New Journal of Prices and Markets

David Howden informs us that a new economics journal is being published by the Ludwig von Mises Institute of Canada! This is good news. As Howden explains:

I proudly announce The Journal of Prices & Markets, a scholarly peer-reviewed journal published bi-annually in collaboration with the Ludwig von Mises Institute of Canada.

The Journal’s goals are straightforward.

First, it is an outlet for those interested not in the glossy superficial nature of events, but the real underlying phenomena shaping them. The journal is not concerned with overly elaborate constructivist plans to recreate the wheel. We don’t need to invent new prices or markets when the old ones no longer seem sufficient at serving their original purposes. What we need is critical analysis into why current events seem so dysfunctional.

Second, and perhaps more importantly, The Journal of Prices & Markets stresses the lost art of relevance. Economics is a beautiful science that should serve the purpose of enlightening us. Instead it has gotten to the state where it creates confusion. As the jokes go, economists predicted ten of the last five recessions, and if you want a second opinion on something, just call back the economist you originally asked. Economists cannot even seem to reach agreement amongst themselves on simple questions, and in a bid to convince each other of their correctness they seek ever more levels of complexity in their theories. Complexity is not necessarily a bad thing, but what should never be lost sight of is the original question.

I particularly like Howden's understanding that "economics is a beautiful science that should serve the purpose of enlightening us."

Read the entire announcement.

Important Affinities and Distinctives between Real Business Cycle Theory and Causal-Realist Economics

John P. Cochran has an excellent article discussing some similarities between real business cycle (RBC) theory and Austrian Causal-Realist explanations of recessions in general and the Great Depression in particular published on Mises.org.

Cochran notes that

some of the results developed by RBC proponents, can supplement the Austrian business cycle theory (ABCT), and add to our understanding of cycle phenomena and other fluctuations in economic activity (see “Capital-Based Macroeconomics: Recent Developments and Extensions of Austrian Business Cycle Theory” or “Capital Based Macroeconomics: Boom and Bust in Japan and the US”).

Note that he thinks that some insights from real business cycle theory can supplement--not replace--the Austrian Theory of the Business Cycle. This is because only the Misesian theory incorporates both money and the capital structure, the two things that integrate the entire social economy.

Therefore, real business cycle certainly leaves some things out and is therefore weaker for it. Cochran notes:

While business cycle phenomena may be caused by exogenous shocks or inappropriately tight monetary policy, much of the actual cyclical activity is best interpreted as the consequence of credit-created unsustainable growth. This type of cyclical activity is preventable with an appropriate monetary framework, but may be difficult to correct with short-run macroeconomic policy. A monetary policy based on the principle of sound — not stable — money would accommodate sustainable growth without generating endogenous instabilities and unsustainable growth.

Which Textbook? Foundations of Economics

In a brief post lauding his insights into the supposed virtues of inflationary expectations, Paul Krugman says, "As far as I know, among basic textbooks only Krugman/Wells even talks about the liquidity trap. . ." Actually Foundations of Economics talks about it, and explains some of its weaknesses as a theory.

I argue in part that:

The concern over the liquidity trap is only as valid as the liquidity preference theory of interest. What we have already learned about the interest rate should be enough to make us question the soundness of this theory. We have seen that the interest rate is not merely a monetary phenomenon, but a time phenomenon. It is the price of present money in exchange for future money. Therefore, the interest rate is determined by people’s subjective time preferences, not the stock of and demand for money.

Stock Investors Partying Like It's 2007

This strikes me as not a good sign. As Business Insider reports, "Cullen Roche of the Pragmatic Capitalism blog has noted that New York Stock Exchange margin debt, which is used to leverage up bets on stocks, is near all-time highs."

It was margin leverage that got the stock market in trouble in 1929 and in 2007-08.

Best Single Quote on Reinhart-Rogoff

By now most are aware that Carmen Reinhart and Kenneth Rogoff have come under attach for data errors in a 2010 working paper they authored arguing that too much debt is not good for the economy. It turns out that a graduate student attempting to replicate their study found a mistake in their original work. This, unfortunately, caused Keynesians and other statists amongst us to dance the "I told you so" jig.

Greg Mankiw had a good reasonable blog post on the issue of data error. The best single quote on the entire subject, however, comes from Caroline Baum in her most recent Bloomberg column "Reinhart-Rogoff Uproar Settles Nothing"

Forget the data for a minute. Imagine asking the average person on the street, Is too much debt a problem? Do you think you would get any negative responses? That’s the essence of Reinhart and Rogoff’s research. You don’t need a doctorate in economics to understand that you can’t spend beyond your means forever, or that piling on debt because it’s cheap to borrow isn’t sound policy.

HT: EconomicPolicyJournal

Did World War II End the Great Depression?

Tom Woods alerts us that the never-ending Robert Reich is still claiming that World War II ended the Great Depression. Woods has, on his Liberty Classroom page, a brief video explaining why Reich is wrong why it is a fallacy to think that the War got us out of the Great Depression. On the same page Woods posts a longer lecture by one of the greatest economic historians of our time, Robert Higgs. Highly recommended.

Are Bachelor's Degrees Worth the Debt?

Jeffrey Selingo warns in the Wall Street Journal that, increasingly, they are not, depending on where you go. In that, he agrees with I wrote just last week.

Some, like Ben Bernanke, claim that student debt is not inflating a higher education bubble that will cause a financial crisis, because the vast majority of student loans are backed by the U.S. Government. So the taxpayers are on the hook and not the banks. Banks will not be in financial distress if students default.

Bernanke’s claim is revealing in that it is clear he views the financial system as the economy. It seems that if the financial system is afloat, everything is okay. Such reasoning ignores that what helps people achieve their ends is not money per se but the actual producer and consumer goods that are produced throughout the social economy.

This fact points to the economic problem with government guaranteed student loans. Investment made possible by subsidized loans of newly created money contributes to an unproductive use of resources.

In the first place, it is not at all clear that the educational payoff matches the expense. According data from the Collegiate Learning Assessment, 45 percent of students its sample demonstrated no significant learning in their first two years of college and 36 percent demonstrated no learning in four years. According to the National Assessment of Adult Literacy, from 1992 to 2003, literacy among college graduates declined at about the same rate that enrollment grew; All the while government grants and guaranteed student loans significantly increased.

This dismal educational payoff is largely because a much of the greater tuition payments made possible by government student loans have been absorbed by increases in personnel. For example in 2007, colleges utilized 13.1 percent more employees to educate the same number of students than they did in 1993. The vast majority of growth has been in administrative staff. In fact, over a fifteen-year period postsecondary administration grew more than twice as much as instructional staff. From 1976 to 2005, the number of administrative staff per student more than doubled; from 3 per 100 students to more than 6 per 100 students. The financial effect of administrating bloat is magnified by the fact that the average mid-level and senior-level administrative salaries are noticeably higher that the average faculty salary.

Not surprisingly the largest increase in college employment expenditures is for administrative staff. Between 1993 and 2007 expenditures per student for instruction increased 39.3 percent, expenditures in research and service increased 37.8 percent. At the same time, however, expenditures per student for administration increased by 61.2 percent

Making available the college experience, many resources must be used. Land, labor, buildings, desks, computers, energy, all sorts of amenities, etc. These are resources that could be used elsewhere. If they are being used to provide education merely due to government subsidies, they are actually more valued in other uses.

For a lot of students college is more a consumption good and less an investment. Multimillion dollar facilities designed to satisfy student recreation need. These include 53-person jacuzzi’s; massage and pedicure services; movie theaters, and ballrooms.

That student debt is fueling malinvestment is indicated by the rising delinquencies. Like the Old Gray Mare, the College Wage Premium ain’t what she used to be.

Increasing default rates prove this. What matters is not only the level of a post-college salary, but the level of that salary relative to the cost of college. Value of the product is not as great as anticipated. Increasing number of students put at risk of not paying off loan.

Additionally, many students who have borrowed money for college do not complete it. Six-year college completion rates at public four-year institutions have remained just below 55 percent for a decade. At the same time the four-year rate has been stuck around 30 percent.

Colleges, universities, and their students are caught in a costly game of Leap Frog. The perceived need for financial aid and loans results in more government subsidies. More debt results in more demand for college and higher tuition. Higher tuition increases perceived need for more debt. More student debt increases the demand for college which increases tuition price. On it goes. The only solution would be to get the government out of the business of subsidizing student debt so at least decisions of students to borrow and banks to lend, and colleges to set tuition will be made based on economic reality and not the shifting sand of monetary inflation.